The rapid credit growth that the country’s commercial banks have been experiencing in recent years is being reined in.
According to the Royal Monetary Authority, the country’s central bank, there was just too much liquidity of the Ngultrum in the banking system. This could be seen in the rapid credit growth, in housing for example, which was leading to increased imports from India and subsequent depletion of the country’s Rupee reserves.
In September this year, the Royal Monetary Authority tightened its monetary policy to mop up the excess Ngultrum liquidity, by raising the Credit Reserve Ratio (CRR) from 13 percent to 15 percent and the face value of RMA bills from Nu 100 million to Nu one billion. The interest on the bills was also increased from 3.5 to five percent.
“Both CRR and the bills are monetary tools to keep the economy healthy,� said Eden Dema, who heads the financial institution supervision division of the central bank. “The credit growth of the financial sector at 28.5 percent, almost twice that of the GDP, is just too much for the economy. It’s like eating more than you can digest.�
She said that, apart from checking inflation, the new measures would compel banks to get more active in the banking business and restrict their easy access to corporate funds, which was fuelling credit growth.
Corporate sector funds have started moving from the banks to the treasury bills, which offer a higher rate of interest than the banks for short-term deposits. The Pension Fund and the Bhutan Trust Fund have put their money in RMA’s treasury bills.
The monetary measures, RMA officials said, were recommended by the International Monetary Fund (IMF) to maintain the exchange rate peg between the Ngultrum and the Indian Rupee. If there is too much Ngultrum following the Indian Rupee, it could lead to a situation where the Ngultrum could depreciate.
During the RMA annual meeting with the financial institutions in Thimphu on November 5, it was agreed to put a cap on the Indian Rupee (INR) exchange in cash to Rs 40,000 through the banks. Any INR transactions (withdrawal/exchange) above Rs 40,000 should be made in negotiable instruments such as demand drafts.
For the country’s two commercial banks, the Bank of Bhutan and the Bhutan National Bank, the recent monetary measures mean that it will be more expensive to mobilize funds “With the statutory liquid ratio at 20 percent and CRR raised to 15 percent for every Nu 100 we raise, Nu 35 has to be kept with RMA on which we earn nothing,� said a BNB official.
A Bank of Bhutan official pointed out that the RMA should a least pay remuneration on the CRR, which stopped last year, because it meant a loss of about 2.2 million every month for the bank. The request was shot down.
The managing director of the Bhutan National Bank, Kipchu Tshering, said that just raising the CRR might not be able to control the outflow of the Rupee. “I think it would be more practical to raise the debt equity to control the Rupee outflow, because that directly reduces the loan component available to clients.� Source: Kuenselonline
